PGT Innovations
PGT, Inc. (Form: 10-K, Received: 03/21/2011 17:00:22)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
  
   
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the fiscal year ended January 1, 2011
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from           to          

Commission File Number: 000-52059

PGT, Inc.
(Exact name of registrant as specified in its charter)
  
   
Delaware
 
20-0634715
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1070 Technology Drive
 North Venice, Florida
  (Address of principal executive offices)
 
 
34275
  (Zip Code)

 
 
Registrant’s telephone number, including area code:
(941) 480-1600

Former name, former address and former fiscal year, if changed since last report:  Not applicable

Securities registered pursuant to Section 12(b) of the Act:

  
   
Title of Each Class
Name of Exchange on Which Registered
Common stock, par value $0.01 per share
 
NASDAQ Global Market

 
Securities registered pursuant to Section 12 (g) of the Act:  None
.
        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o  No  þ

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  o      No  þ

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o                  Accelerated filer  o                   Non-accelerated filer  þ                   Smaller reporting company  o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes  o      No  þ


        The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of July 2, 2010 was approximately $47,543,175 based on the closing price per share on that date of $2.47 as reported on the NASDAQ Global Market.

        The number of shares of the registrant’s common stock, par value $0.01, outstanding as of March 11, 2011 was 53,670,135.

DOCUMENTS INCORPORATED BY REFERENCE
        Portions of the Company’s Proxy Statement for the Company’s 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.


 
 


PGT, INC.
 
 
Table of Contents to Form 10-K  
           
     
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PART I
 
 
   
BUSINESS
 
GENERAL DEVELOPMENT OF BUSINESS

         Description of the Company

We are the leading U.S. manufacturer and supplier of residential impact-resistant windows and doors and pioneered the U.S. impact-resistant window and door industry. Our impact-resistant products, which are marketed under the WinGuard®, PremierVue ™ and PGT Architectural Systems brand names, combine heavy-duty aluminum or vinyl frames with laminated glass to provide protection from hurricane-force winds and wind-borne debris by maintaining their structural integrity and preventing penetration by impacting objects. Impact-resistant windows and doors satisfy stringent building codes in hurricane-prone coastal states and provide an attractive alternative to shutters and other “active” forms of hurricane protection that require installation and removal before and after each storm. Combining the impact resistance of WinGuard with our insulating glass creates energy efficient windows that can significantly reduce cooling and heating costs.  We also manufacture non-impact resistant products in both aluminum and vinyl frames including our SpectraGuard ™ line of products.  Our current market share in Florida, which is the largest U.S. impact-resistant window and door market, is significantly greater than that of any of our competitors.

The geographic regions in which we currently operate include the Southeastern U.S., Gulf Coast, Coastal mid-Atlantic, the Caribbean, Central America and Canada. We distribute our products through multiple channels, including over 1,300 window distributors, building supply distributors, window replacement dealers and enclosure contractors. This broad distribution network provides us with the flexibility to meet demand as it shifts between the residential new construction and repair and remodeling end markets.

We operate manufacturing facilities in North Venice, Florida and in Salisbury, North Carolina, which produce fully-customized windows and doors. We are vertically integrated with glass tempering and laminating facilities in both states, which provide us with a consistent source of impact-resistant laminated glass, shorter lead times, and lower costs relative to third-party sourcing.

On December 3, 2010, we announced that our Salisbury, North Carolina operations would be transferred to Venice, Florida to consolidate our window and door production at our Florida manufacturing facilities.  This consolidation is expected to be completed during the second quarter of 2011.  We believe transitioning to a centralized location will optimize our manufacturing capacity and logistics, positioning us to be a stronger company with focus on growing our share within our core wind-borne debris market areas.

We also own a facility in Lexington, North Carolina that is vacant and beginning in January 2010 was marketed for sale.  In January 2011, we accepted an offer to sell our Lexington, North Carolina facility contingent upon certain conditions.   We expect the sale of the Lexington, North Carolina facility to close in the second quarter of 2011.


History

Our subsidiary, PGT Industries, Inc., was founded in 1980 as Vinyl Technology, Inc. The PGT brand was established in 1987, and we introduced our WinGuard branded product line in the aftermath of Hurricane Andrew in 1992.

PGT, Inc. is a Delaware corporation formed on December 16, 2003, as JLL Window Holdings, Inc. by an affiliate of JLL Partners, our largest stockholder, in connection with its acquisition of PGT Holding Company on January 29, 2004.  On February 15, 2006, we changed our name to PGT, Inc., and on June 27, 2006 we became a publicly listed company on the NASDAQ National Market under the symbol “PGTI”.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

We operate as one segment, the manufacture and sale of windows and doors.  Additional required information is included in Item 8.

NARRATIVE DESCRIPTION OF BUSINESS

Our Products

We manufacture complete lines of premium, fully customizable aluminum and vinyl windows and doors and porch enclosure products targeting both the residential new construction and repair and remodeling end markets. All of our products carry the PGT brand, and our consumer-oriented products carry an additional, trademarked product name, including WinGuard, Eze-Breeze, SpectraGuard, and, introduced in late 2009, PremierVue.

Window and door products

WinGuard. WinGuard is an impact-resistant product line and combines heavy-duty aluminum or vinyl frames with laminated glass to provide protection from hurricane-force winds and wind-borne debris that satisfy increasingly stringent building codes and primarily target hurricane-prone coastal states in the U.S., as well as the Caribbean and Central America. Combining the impact resistance of WinGuard with our insulating glass creates energy efficient windows that can significantly reduce cooling and heating costs.

Aluminum. We offer a complete line of fully customizable, non-impact-resistant aluminum frame windows and doors. These products primarily target regions with warmer climates, where aluminum is often preferred due to its ability to withstand higher structural loads. Adding our insulating glass creates energy efficient windows that can significantly reduce cooling and heating costs.

Vinyl. We offer a complete line of fully customizable, non-impact-resistant vinyl frame windows and doors where the energy-efficient characteristics of vinyl frames are critical. In early 2008, we introduced a new line of energy efficient vinyl windows for new construction with wood-like aesthetics, such as brick-mould frames, wood-like trim detail and simulated divided lights. In early 2009, we added a line of vinyl replacement windows with the same superior energy performance and wood-like detail and branded the product lines as SpectraGuard.  These Energy-Star rated windows also met the qualifications for the 30/30 federal tax credit.  In 2010 we introduced a SpectraGuard vinyl window line with the same Energy-Star ratings and wood-like aesthetics  designed and targeted to meet  the needs of the Florida market.   

PremierVue .  Introduced in the Fall of 2009, PremierVue is a complete line of impact-resistant vinyl window products that are tailored for the mid to high end of the replacement market, primarily targeting single and multi-family homes and low to mid-rise condominiums in Florida and other coastal regions of the Southeastern U.S. Combining structural strength and energy efficiency, these products are designed for flexibility in today’s market, offering both laminated and laminated-insulated impact-resistant glass options. PremierVue’s large test sizes and high design pressures, combined with vinyl’s inherent thermal efficiency, make these products truly unique in the window and door industry.

Architectural Systems. Similar to WinGuard, Architectural Systems products are impact-resistant, offering protection from hurricane-force winds and wind-borne debris for mid- and high-rise buildings rather than single family homes.

Eze-Breeze. Eze-Breeze non-glass vertical and horizontal sliding panels for porch enclosures are vinyl-glazed, aluminum-framed products used for enclosing screened-in porches that provide protection from inclement weather.

Sales and Marketing

Our sales strategy primarily focuses on attracting and retaining distributors and dealers by consistently providing exceptional customer service, leading product quality, and competitive pricing and using our advanced knowledge of building code requirements and technical expertise.
 
Our marketing strategy is designed to reinforce the high quality of our products and focuses on both coastal and inland markets. We support our markets through print and web based advertising, consumer and builder promotions, and selling and collateral materials. We also work with our dealers and distributors to educate consumers and homebuilders on the advantages of using impact-resistant and energy efficient products. We market our products based on quality, building code compliance, outstanding service, shorter lead times, and on-time delivery using our fleet of trucks and trailers.

Our Customers

We have a highly diversified customer base that is comprised of over 1,300 window distributors, building supply distributors, window replacement dealers and enclosure contractors.  Our largest customer accounts for approximately 5% of net sales and our top ten customers account for approximately 18% of net sales. Our sales are comprised of residential new construction and home repair and remodeling end markets, which represented approximately 25% and 75% of our sales, respectively, during 2010.  This compares to 27% and 73% in 2009.

We do not supply our products directly to homebuilders but believe demand for our products is also a function of our relationships with a number of national homebuilders, which we believe are strong.

Materials and Supplier Relationships

Our primary manufacturing materials include aluminum and vinyl extrusions, glass, ionoplast, and polyvinyl butyral. Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice.  All of our materials are typically readily available from other sources. Aluminum and vinyl extrusions accounted for approximately 44% of our material purchases during fiscal year 2010. Sheet glass, which is sourced from two major national suppliers, accounted for approximately 18% of our material purchases during fiscal year 2010. Sheet glass that we purchase comes in various sizes, tints, and thermal properties. Polyvinyl butyral and ionoplast, which are both used as inner layer in laminated glass, accounted for approximately 16% of our material purchases during fiscal year 2010.

Backlog

As of January 1, 2011, backlog was $8.2 million compared to $8.5 million at January 2, 2010.  Our backlog consists of orders that we have received from customers that have not yet shipped, and we expect that substantially all of our current backlog will be recognized as sales in the first quarter of 2011.

Intellectual Property

We own and have registered trademarks in the United States. In addition, we own several patents and patent applications concerning various aspects of window assembly and related processes.  We are not aware of any circumstances that would have a material adverse effect on our ability to use our trademarks and patents.  As long as we continue to renew our trademarks when necessary, the trademark protection provided by them is perpetual.

Manufacturing

Our primary manufacturing facility is located in Florida where we produce fully-customized products. The manufacturing process typically begins in one of our glass plants where we cut, temper and laminate sheet glass to meet specific requirements of our customers’ orders.  On December 3, 2010, we announced that our Salisbury, North Carolina operations would be transferred to Venice, Florida to consolidate our window and door production at our Florida manufacturing facilities.  For additional information see Footnote 4 in Item 8 “Financial Statements and Supplementary Data” in this Form 10-K.

Glass is transported to our window and door assembly lines in a make-to-order sequence where it is combined with an aluminum or vinyl frame. These frames are also fabricated to order, as we start with a piece of extruded material that we cut and shape into a frame that fits our customers’ specifications. After an order has been completed, it is immediately staged for delivery on our trucking fleet and shipped within an average of 48 hours of completion.


Competition

The window and door industry is highly fragmented and the competitive landscape is based on geographic scope. The competition falls into one of two categories: local and regional manufacturers, and national window and door manufacturers.

Local and Regional Window and Door Manufacturers: This group of competitors consists of numerous local job shops and small manufacturing facilities that tend to focus on selling products to local or regional dealers and wholesalers. Competitors in this group typically lack marketing support and the service levels and quality controls demanded by larger distributors, as well as the ability to offer a full complement of products.

National Window and Door Manufacturers: This group of competitors tends to focus on selling branded products nationally to dealers and wholesalers and has multiple locations.

The principal methods of competition in the window and door industry are the development of long-term relationships with window and door dealers and distributors, and the retention of customers by delivering a full range of high-quality products on time while offering competitive pricing and flexibility in transaction processing. Trade professionals such as contractors, homebuilders, architects and engineers also engage in direct interaction and look to the manufacturer for training and education of product and code. Although some of our competitors may have greater geographic scope and access to greater resources and economies of scale than do we, our leading position in the U.S. impact-resistant window and door market and the high quality of our products position us well to meet the needs of our customers.

Environmental Considerations

Although our business and facilities are subject to federal, state, and local environmental regulation, environmental regulation does not have a material impact on our operations, and we believe that our facilities are in material compliance with such laws and regulations.

Employees

As of February 17, 2011, we employed approximately 1,200 people, none of whom were represented by a union. We believe that we have good relations with our employees.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

Our domestic and international net sales for the three years ended January 1, 2011, January 2, 2010 and January 3, 2009 are as follows (in thousands):
 
 
                   
   
Year Ended
 
   
January 1,
   
January 2,
   
January 3,
 
   
2011
   
2010
   
2009
 
                   
Domestic
  $ 167.8     $ 156.5     $ 205.9  
International
    7.9       9.5       12.7  
    $ 175.7     $ 166.0     $ 218.6  



AVAILABLE INFORMATION

Our Internet address is www.pgtindustries.com . Through our Internet website under “Financial Information” in the Investors section, we make available free of charge, as soon as reasonably practical after such information has been filed with the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. Also available through our Internet website under “Corporate Governance” in the Investors section are our Code of Business Conduct and Ethics and our Code of Ethics for Senior Financial Officers. We are not including this or any other information on our website as a part of, nor incorporating it by reference into this Form 10-K, or any of our other SEC filings. The SEC maintains an Internet site that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov .

Item 1A.   RISK FACTORS

We are subject to regional and national economic conditions. The unprecedented decline in the economy in Florida and throughout the United States could continue to negatively affect demand for our products which has had, and which could continue to have, an adverse impact on our sales and results of operations.

The new home construction and repair and remodeling markets have declined. Beginning in the second half of 2006, we saw a significant slowdown in the Florida housing market.  This slowdown continued during 2007 through 2009.  Like many building material suppliers in the industry, we have been and will continue to be faced with a challenging operating environment due to this decline in the housing market.  Specifically, new single family housing permits in Florida decreased by 47% in 2008 and 30% in 2009, each as compared to the prior year, and remained at historically low levels in 2010.  Beginning in the third quarter of 2008, we began to see a decrease in consumer spending for repair and remodeling projects as credit tightened and many homeowners lost substantial equity in their homes.  The resulting decline in new home and repair and remodeling construction levels by our customers has decreased demand for our products which has had, and which could continue to have, an adverse impact on our sales and results of operations.

Current economic and credit market conditions have increased the risk that we may not collect a greater percentage of our receivables. Economic and credit conditions have negatively impacted our bad debt expense which has adversely impacted our results of operations.  If these conditions persist, our results of operations may continue to be adversely impacted by bad debts. We monitor our customers’ credit profiles carefully and make changes in our terms when necessary in response to this heightened risk.

We are subject to fluctuations in the prices of our raw materials . We experience significant fluctuations in the cost of our raw materials, including aluminum extrusion, polyvinyl butyral and glass. A variety of factors over which we have no control, including global demand for aluminum, fluctuations in oil prices, speculation in commodities futures and the creation of new laminates or other products based on new technologies impact the cost of raw materials we purchase for the manufacture of our products. While we attempt to minimize our risk from severe price fluctuations by entering into aluminum forward contracts to hedge these fluctuations in the purchase price of aluminum extrusion we use in production, substantial, prolonged upward trends in aluminum prices could significantly increase the cost of the unhedged portions of our aluminum needs and have an adverse impact on our results of operations. We anticipate that these fluctuations will continue in the future. While we have entered into a three-year supply agreement through early 2012 with a major producer of ionoplast inner layer that we believe provides us with a reliable, single source for ionoplast with stable pricing on favorable terms, if one or both parties to the agreement do not satisfy the terms of the agreement it may be terminated which could result in our inability to obtain ionoplast on commercially reasonable terms having an adverse impact on our results of operations.  While historically we have to some extent been able to pass on significant cost increases to our customers, our results between periods may be negatively impacted by a delay between the cost increases and price increases in our products.
 
 
We depend on third-party suppliers for our raw materials. Our ability to offer a wide variety of products to our customers depends on receipt of adequate material supplies from manufacturers and other suppliers. Generally, our raw materials and supplies are obtainable from various sources and in sufficient quantities. However, it is possible that our competitors or other suppliers may create laminates or products based on new technologies that are not available to us or are more effective than our products at surviving hurricane-force winds and wind-borne debris or that they may have access to products of a similar quality at lower prices. Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice. Moreover, other than with our suppliers of polyvinyl butyral and aluminum, we do not have long-term contracts with the suppliers of our raw materials.

Transportation costs represent a significant part of our cost structure. Although prices decreased significantly in the fourth quarter of 2008 and stabilized somewhat in 2009 they began to increase again in late 2010.  The increase in fuel prices in 2008 had a negative effect on our distribution costs.  Another rapid and prolonged increase in fuel prices may significantly increase our costs and have an adverse impact on our results of operations.

The home building industry and the home repair and remodeling sector are regulated. The homebuilding industry and the home repair and remodeling sector are subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, building design and safety, construction, and similar matters, including regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area. Increased regulatory restrictions could limit demand for new homes and home repair and remodeling products and could negatively affect our sales and results of operations.

Our operating results are substantially dependent on sales of our WinGuard branded line of products. A majority of our net sales are, and are expected to continue to be, derived from the sales of our WinGuard branded line of products. Accordingly, our future operating results will depend on the demand for WinGuard products by current and future customers, including additions to this product line that are subsequently introduced. If our competitors release new products that are superior to WinGuard products in performance or price, or if we fail to update WinGuard products with any technological advances that are developed by us or our competitors or introduce new products in a timely manner, demand for our products may decline. A decline in demand for WinGuard products as a result of competition, technological change or other factors could have a material adverse effect on our ability to generate sales, which would negatively affect results of operations.

Changes in building codes could lower the demand for our impact-resistant windows and doors. The market for our impact-resistant windows and doors depends in large part on our ability to satisfy state and local building codes that require protection from wind-borne debris. If the standards in such building codes are raised, we may not be able to meet their requirements, and demand for our products could decline. Conversely, if the standards in such building codes are lowered or are not enforced in certain areas, demand for our impact-resistant products may decrease. Further, if states and regions that are affected by hurricanes but do not currently have such building codes fail to adopt and enforce hurricane protection building codes, our ability to expand our business in such markets may be limited.

Our industry is competitive, and competition may increase as our markets grow or as more states adopt or enforce building codes that require impact-resistant products. The window and door industry is highly competitive. We face significant competition from numerous small, regional producers, as well as certain national producers. Any of these competitors may (i) foresee the course of market development more accurately than do we, (ii) develop products that are superior to our products, (iii) have the ability to produce similar products at a lower cost, or (iv) adapt more quickly to new technologies or evolving customer requirements than do we. Additionally, new competitors may enter our industry, and larger existing competitors may increase their efforts and devote substantially more resources to expand their presence in the impact-resistant market.  If we are unable to compete effectively, demand for our products may decline.

In addition, while we are skilled at creating finished impact-resistant and other window and door products, the materials we use can be purchased by any existing or potential competitor. New competitors can enter our industry, and existing competitors may increase their efforts in the impact-resistant market. Furthermore, if the market for impact-resistant windows and doors continues to expand, larger competitors could enter or expand their presence in the market and may be able to compete more effectively. Finally, we may not be able to maintain our costs at a level for us to compete effectively. If we are unable to compete effectively, demand for our products and our profitability may decline.

Our business is currently concentrated in one state. Our business is concentrated geographically in Florida. In fiscal year 2010, approximately 81% of our sales were generated in Florida,  a state in which new single family housing permits remain at historically low levels. Our recent announcement to consolidate operations into a single manufacturing location to optimize our manufacturing capacity and logistics was based, in part, on our belief that a focused approach to growing our share within our core wind-borne debris markets in Florida, from the Gulf Coast to the mid-Atlantic, and certain international markets, will maximize value and return.  However, such a focus may further concentrate our business, and a continued or prolonged decline in the economy of the state of Florida or of certain coastal regions, a change in state and local building code requirements for hurricane protection, or any other adverse condition in the state or certain coastal regions, could cause a decline in the demand for our products, which could have an adverse impact on our sales and results of operations.

Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our obligations under our debt instruments. As of January 1, 2011, our indebtedness under our first lien term loan was $50.0 million. All of our debt was at a variable interest rate. In the event that interest rates rise, our interest expense would increase. A 1.0% increase in interest rates above our established floor would result in approximately $0.5 million of additional interest expense annually.

The level of our debt could have certain consequences, including:

     
 
 
·   increasing our vulnerability to general economic and industry conditions;
   
 
 
·   requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;
   
 
 
·   exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our credit facilities, will be at variable rates of interest;
   
 
 
·   limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and
   
 
 
·   limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have less debt.
 
 

A continuation of the downturn in our markets could adversely impact our credit agreement which comes due and payable in February 2012.   As of January 1, 2011, we had $50.2 million of outstanding indebtedness. As noted elsewhere in this report, we have experienced a significant deterioration in the various markets in which we compete. A continued significant deterioration in these markets may adversely impact our ability to meet certain covenants under our credit agreement.   Additionally, our indebtedness comes due and payable in February 2012.  If we are unable to refinance this indebtedness on satisfactory terms, we may be required to dedicate a more substantial portion of our operating cash flows to our indebtedness, which may limit our flexibility in planning for, or reacting to, changes in our business or investing in our growth.

We may incur additional indebtedness. We may incur additional indebtedness under our credit facilities, which provide for up to $25 million of revolving credit borrowings, under the current Third Amendment which became effective on March 17, 2010. In addition, we and our subsidiary may be able to incur substantial additional indebtedness in the future, including secured debt, subject to the restrictions contained in the agreements governing our credit facilities. If new debt is added to our current debt levels, the related risks that we now face could intensify.

Our debt instruments contain various covenants that limit our ability to operate our business. Our credit facility contains various provisions that limit our ability to, among other things, transfer or sell assets, including the equity interests of our subsidiary, or use asset sale proceeds; pay dividends or distributions on our capital stock or repurchase our capital stock; make certain restricted payments or investments; create liens to secure debt; enter into transactions with affiliates; merge or consolidate with another company; and engage in unrelated business activities.

In addition, our credit facilities require us to meet specified financial ratios. These covenants may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with these and other provisions of our credit facilities may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments, or other events beyond our control. The breach of any of these covenants, including those contained in our credit facilities, could result in a default under our indebtedness, which could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it.

We may be adversely affected by any disruption in our information technology systems. Our operations are dependent upon our information technology systems, which encompass all of our major business functions. A disruption in our information technology systems for any prolonged period could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships.

We may be adversely affected by any disruptions to our manufacturing facilities or disruptions to our customer, supplier, or employee base. Any disruption to our facilities resulting from hurricanes and other weather-related events, fire, an act of terrorism, or any other cause could damage a significant portion of our inventory, affect our distribution of products, and materially impair our ability to distribute our products to customers. We could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a damaged facility. In addition, if there are disruptions to our customer and supplier base or to our employees caused by hurricanes, our business could be temporarily adversely affected by higher costs for materials, increased shipping and storage costs, increased labor costs, increased absentee rates, and scheduling issues. Furthermore, some of our direct and indirect suppliers have unionized work forces, and strikes, work stoppages, or slowdowns experienced by these suppliers could result in slowdowns or closures of their facilities. Any interruption in the production or delivery of our supplies could reduce sales of our products and increase our costs.

Failure to Realize All of the Anticipated Benefits of the Consolidation of our Operations.   The success of our recently announced consolidation of operations into our facilities in Florida will depend, in large part, on our ability to realize the anticipated benefits and cost savings from integrating the manufacturing and other operations from our Florida and North Carolina locations.  If we are not able to successfully integrate the operations of the two locations, the anticipated benefits and cost savings of the consolidation may not be realized fully or at all or may take longer to realize than expected.  Additionally, we may not be able to timely serve the needs of our customers, and this could have an adverse impact on our sales and results of operations.

The nature of our business exposes us to product liability and warranty claims. We are, from time to time, involved in product liability and product warranty claims relating to the products we manufacture and distribute that, if adversely determined, could adversely affect our financial condition, results of operations, and cash flows. In addition, we may be exposed to potential claims arising from the conduct of homebuilders and home remodelers and their sub-contractors. Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts, we may not be able to maintain such insurance on acceptable terms or such insurance may not provide adequate protection against potential liabilities. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our company.

We are subject to potential exposure to environmental liabilities and are subject to environmental regulation. We are subject to various federal, state, and local environmental laws, ordinances, and regulations. Although we believe that our facilities are in material compliance with such laws, ordinances, and regulations, as owners and lessees of real property, we can be held liable for the investigation or remediation of contamination on such properties, in some circumstances, without regard to whether we knew of or were responsible for such contamination. Remediation may be required in the future as a result of spills or releases of petroleum products or hazardous substances, the discovery of unknown environmental conditions, or more stringent standards regarding existing residual contamination. More burdensome environmental regulatory requirements may increase our general and administrative costs and may increase the risk that we may incur fines or penalties or be held liable for violations of such regulatory requirements.

We conduct all of our operations through our subsidiary, and rely on payments from our subsidiary to meet all of our obligations. We are a holding company and derive all of our operating income from our subsidiary, PGT Industries, Inc. All of our assets are held by our subsidiary, and we rely on the earnings and cash flows of our subsidiary to meet our debt service obligations. The ability of our subsidiary to make payments to us will depend on its respective operating results and may be restricted by, among other things, the laws of its jurisdiction of organization (which may limit the amount of funds available for distributions to us), the terms of existing and future indebtedness and other agreements of our subsidiary, including our credit facilities, and the covenants of any future outstanding indebtedness we or our subsidiary incur.
 
We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002. We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. While we have concluded that at January 1, 2011, we have no material weaknesses in our internal controls over financial reporting, we cannot assure you that we will not have a material weakness in the future. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. If we fail to maintain a system of internal controls over financial reporting that meets the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities such as the SEC or by the NASDAQ Stock Market LLC. Additionally, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements and our stock price may be adversely affected. If we fail to remedy any material weakness, our financial statements may be inaccurate, we may not have access to the capital markets, and our stock price may be adversely affected.

The controlling position of an affiliate of JLL Partners limits the ability of our minority stockholders to influence corporate matters. An affiliate of JLL Partners owned 59.8% of our outstanding common stock as of January 1, 2011. Accordingly, such affiliate of JLL Partners has significant influence over our management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership may have the effect of delaying or preventing a transaction such as a merger, consolidation, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a transaction or change of control would benefit minority stockholders. In addition, this concentrated control limits the ability of our minority stockholders to influence corporate matters, and such affiliate of JLL Partners, as a controlling stockholder, could approve certain actions, including a going-private transaction, without approval of minority stockholders, subject to obtaining any required approval of our board of directors for such transaction. As a result, the market price of our common stock could be adversely affected.

The controlling position of an affiliate of JLL Partners exempts us from certain Nasdaq corporate governance requirements. Although we have satisfied all applicable Nasdaq corporate governance rules, for so long as an affiliate of JLL Partners continues to own more than 50% of our outstanding shares, we will continue to avail ourselves of the Nasdaq Listing Rule 5615(c) “controlled company” exemption that applies to companies in which more than 50% of the stockholder voting power is held by an individual, a group, or another company. This rule grants us an exemption from the requirements that we have a majority of independent directors on our board of directors and that we have independent directors determine the compensation of executive officers and the selection of nominees to the board of directors. However, we intend to comply with such requirements in the event that such affiliate of JLL Partners’ ownership falls to or below 50%.

Our directors and officers who are affiliated with JLL Partners do not have any obligation to report corporate opportunities to us. Because some individuals may serve as our directors or officers and as directors, officers, partners, members, managers, or employees of JLL Partners or its affiliates or investment funds and because such affiliates or investment funds may engage in similar lines of business to those in which we engage, our amended and restated certificate of incorporation allocates corporate opportunities between us and JLL Partners and its affiliates and investment funds. Specifically, for so long as JLL Partners and its affiliates and investment funds own at least 15% of our shares of common stock, none of JLL Partners, nor any of its affiliates or investment funds, or their respective directors, officers, partners, members, managers, or employees has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as do we. In addition, if any of them acquires knowledge of a potential transaction that may be a corporate opportunity for us and for JLL Partners or its affiliates or investment funds, subject to certain exceptions, we will not have any expectancy in such corporate opportunity, and they will not have any obligation to communicate such opportunity to us.

Item 1B .    UNRESOLVED STAFF COMMENTS

None.

   
PROPERTIES

 The following properties were held and used as of January 1, 2011:
 
 
 
   
Manufacturing
   
Support
   
Storage
 
   
(in square feet)
 
Owned:
                 
  Main Plant and Corporate Office, North Venice, FL
    348,000       15,000       -  
  Glass termpering and laminating, North Venice, FL
    80,000       -       -  
  Insulated Glass, North Venice, FL
    42,000       -       -  
  PGT Wellness Center, North Venice, FL
    -       3,600       -  
  Manufacturing Facility Salisbury, NC
    379,000       14,000       -  
                         
Leased:
                       
   James Street Storage, Venice, FL
    -       -       15,000  
   Endeavor Court, Nokomis, FL
    -       2,300       -  
   Endeavor Court, Nokomis, FL
    -       6,100       -  
   Fleet Maintenance Building, North Venice, FL
    -       16,000       -  
      849,000       57,000       15,000  

On December 3, 2010, we announced that our Salisbury, North Carolina operations would be transferred to Venice, Florida to consolidate our window and door production at our Florida plant.  This consolidation is expected to be completed during the second quarter of 2011.

We also own a facility in Lexington, North Carolina that is vacant and, beginning in January 2010, was marketed for sale.  In January 2011, we accepted an offer to sell our Lexington, North Carolina facility contingent upon certain conditions.   We expect the sale of the Lexington, North Carolina facility to close in the second quarter of 2011.

Our leases listed above expire between November 2011 and January 2016.   Each of the leases provides for a fixed annual rent. The leases require us to pay taxes, insurance and common area maintenance expenses associated with the properties.

All of our owned properties secure borrowings under our first lien credit agreement. We believe all of these operating facilities are adequate in capacity and condition to service existing customer needs.
   

LEGAL PROCEEDINGS
 
We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our financial position, cash flows or results of operations.

   
RESERVED
 


PART II
 
   
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our Common Stock has been traded on the NASDAQ Global Market ® under the symbol “PGTI”. On March 10, 2011, the closing price of our Common Stock as reported on the NASDAQ Global Market was $2.25. The approximate number of stockholders of record of our Common Stock on that date was 48, although we believe that the number of beneficial owners of our Common Stock is substantially greater.
 
 
The table below sets forth the price range of our Common Stock during the periods indicated.
 


   
High
 
Low
2010
     1st Quarter
 
$
2.39
   
$
1.50
 
     2 nd Quarter
 
$
3.70
   
$
1.87
 
     3 rd Quarter
 
$
2.76
   
$
1.90
 
     4 th Quarter
 
$
2.70
   
$
2.02
 
                 
2009
     1st Quarter
 
$
1.50
   
$
0.80
 
     2 nd Quarter
 
$
2.88
   
$
1.20
 
     3 rd Quarter
 
$
3.19
   
$
1.50
 
     4 th Quarter
 
$
2.85
   
$
2.00
 


Dividends

We do not pay a regular dividend. Any determination relating to dividend policy will be made at the discretion of our board of directors. The terms of our senior secured credit facility governing our notes currently restrict our ability to pay dividends.

 
Unregistered Sales of Equity Securities

None.

Performance Graph

The following graphs compare the percentage change in PGT, Inc.’s cumulative total stockholder return on its Common Stock with the cumulative total stockholder return of the Standard & Poor’s Building Products Index and the NASDAQ Composite Index over the period from June 27, 2006 (the date we became a public company) to January 1, 2011.
 

COMPARISON OF 54 MONTH CUMULATIVE TOTAL RETURN*
AMONG PGT, INC., THE NASDAQ COMPOSITE INDEX,
AND THE S&P BUILDING PRODUCTS INDEX

 
PERFORMANCE GRAPH
   
6/27/2006
      6/06       9/06    
12/30/2006
      3/07       6/07       9/07    
12/29/2007
 
PGT, Inc.
    100.00       112.86       100.43       90.36       85.71       78.07       78.07       56.64  
S&P Building Products
    100.00       102.51       96.65       105.41       106.85       114.67       114.67       95.04  
NASDAQ Composite
    100.00       103.42       107.53       115.00       115.30       123.95       123.95       128.63  
                                                                   
      3/08       6/08       9/08    
1/3/2009
      4/09       6/09       9/09    
1/2/2010
 
PGT, Inc.
    21.21       22.71       23.29       8.43       10.71       11.71       19.71       14.93  
S&P Building Products
    98.60       83.05       94.71       58.76       40.44       46.04       63.88       72.91  
NASDAQ Composite
    108.52       109.18       99.60       75.09       76.61       86.83       97.17       109.17  
                                                                 
      4/10       7/10       9/10    
1/1/2011
                                 
PGT, Inc.
    13.50       17.64       16.43       17.50                                  
S&P Building Products
    81.94       56.80       58.13       66.84                                  
NASDAQ Composite
    114.39       99.60       112.88       126.31                                  

 
* $100 invested on 6/27/2006 in stock or in index-including reinvestment of dividends for 54 months ending January 1, 2011.

 
SELECTED FINANCIAL DATA
 
The following table sets forth selected historical consolidated financial information and other data as of and for the periods indicated and have been derived from our audited consolidated financial statements.

All information included in the following tables should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7, and with the consolidated financial statements and related notes in Item 8. All years consisted of 52 weeks except for the year ended January 3, 2009 which consisted of 53 weeks. We do not believe the impact on comparability of results is significant.


                               
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
 
Consolidated Selected Financial Data
 
January 1,
   
January 2,
   
January 3,
   
December 29,
   
December 30,
 
(in thousands except per share data)
 
2011
   
2010
   
2009
   
2007
   
2006
 
                               
 Net sales
  $ 175,741     $ 166,000     $ 218,556     $ 278,394     $ 371,598  
 Cost of sales
    125,403       121,622       150,277       187,389       229,867  
                                         
 Gross margin
    50,338       44,378       68,279       91,005       141,731  
     Impairment charges(1)
    5,561       742       187,748       826       1,151  
     Stock compensation expense(2)
    -       -       -       -       26,898  
     Selling, general and administrative
                                       
       expenses
    54,091       51,902       63,109       77,004       86,219  
                                         
 (Loss) income from operations
    (9,314 )     (8,266 )     (182,578 )     13,175       27,463  
 Interest expense
    5,123       6,698       9,283       11,404       28,509  
 Other (income) expense, net(3)
    (19 )     37       (40 )     692       (178 )
                                         
 (Loss) income before income taxes
    (14,418 )     (15,001 )     (191,821 )     1,079       (868 )
 Income tax expense (benefit)
    77       (5,584 )     (28,789 )     456       101  
                                         
 Net (loss) income
  $ (14,495 )   $ (9,417 )   $ (163,032 )   $ 623     $ (969 )
                                         
 Net (loss) income per common share:
                                       
     Basic
  $ (0.29 )   $ (0.26 )   $ (5.08 )   $ 0.02     $ (0.04 )
     Diluted
  $ (0.29 )   $ (0.26 )   $ (5.08 )   $ 0.02     $ (0.04 )
 Weighted average shares outstanding:
                                       
     Basic(4)
    50,174       36,241       32,104       29,163       22,656  
     Diluted(4)
    50,174       36,241       32,104       30,207       22,656  
                                         
 Other financial data:
                                       
     Depreciation
  $ 9,180     $ 10,435     $ 11,518     $ 10,418     $ 9,871  
     Amortization
    6,028       5,731       5,570       5,570       5,742  
                                         
   
As Of
   
As Of
   
As Of
   
As Of
   
As Of
 
   
January 1,
   
January 2,
   
January 3,
   
December 29,
   
December 30,
 
      2011       2010       2009       2007       2006  
 Balance Sheet data:
                                       
     Cash and cash equivalents
  $ 22,012     $ 7,417     $ 19,628     $ 19,479     $ 36,981  
     Total assets
    169,119       173,630       200,617       407,865       442,794  
     Total debt, including current portion
    50,163       68,268       90,366       130,000       165,488  
     Shareholders’ equity
    83,042       68,209       74,185       210,472       205,206  

(1)  
In 2010, amounts relates to write-down of the value of our Salisbury North Carolina, Lexington, North Carolina properties and certain other equipment of the Company.  In 2009, 2007 and 2006, amount relates to write-down of the value of our Lexington, North Carolina property. In 2008, amount relates to intangible asset impairment charges. See Notes 2 and 7 in Item 8.

(2)  
Represents compensation expense paid to stock option holders (including applicable payroll taxes) in lieu of adjusting exercise prices in connection with the dividends paid to shareholders in February 2006 of $26.9 million, including expenses. This amount includes amounts paid to stock option holders whose other compensation is a component of cost of sales of $5.1 million.
 
(3)  
Relates to derivative financial instruments.

(4)  
Weighted average common shares outstanding for all periods have been restated to give effect to the bonus element in the 2010 rights offering.

 
 
-13-

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8. We also advise you read the risk factors in Item 1A.  Our MD&A is presented in seven sections:

·  
Executive Overview;
·  
Results of Operations;
·  
Liquidity and Capital Resources;
·  
Disclosures of Contractual Obligations and Commercial Commitments;
·  
Critical Accounting Estimates;
·  
Recently Issued Accounting Standards; and
·  
Forward Outlook


EXECUTIVE OVERVIEW

Sales and Operations

On February 24, 2011, we issued a press release and held a conference call on Friday, February 25, 2011 to review the results of operations for our fiscal year ended January 1, 2011.  During the call, we also discussed current market conditions and progress made regarding certain of our initiatives. The overview and estimates contained in this report are consistent with those given in our press release and discussed on the call. We are neither updating nor confirming that information.

In 2010, we posted a 5.9% increase in sales, our first annual sales growth since 2006.   This includes quarter over quarter growth in three of the four quarters.  Our vinyl products, including Vinyl WinGuard, non-impact vinyl, and PremierVue, lead this growth.  Vinyl WinGuard sales increased 20%, including $1.7 million in growth into the southern portion of Florida.   Also, non-impact vinyl sales grew 60% year over year due to growth of products launched over the past three years, including a series of windows designed for the Florida market.  Finally, in its first full year, PremierVue generated $3.7 million in sales for 2010.

During the fourth quarter of 2010, we acquired the intellectual property assets of Hurricane Window and Door Technologies, LLC of Fort Myers, Florida.  We purchased certain operating assets during 2009 and branded this high-end energy efficient impact vinyl line PremierVue.  Designed specifically for  the hurricane protection market, these products provide long-term energy and structural benefits that meet both the structural requirements of Miami-Dade for impact protection and energy rating requirements of programs sponsored by the Department of Energy.

Within our core market, housing starts were up 23%, driven by an increase in single family starts of 23%.  During the middle of the year, single family starts approached 9,000 per quarter, compared to about 6,000 in 2009.  However by the end of the year, housing starts were closer to the levels experienced in 2009.  Market conditions remain difficult, but overall housing starts and permits appear to have reached a bottom and are starting to show signs of life.

During the fourth quarter of 2010, we announced the decision to consolidate our North Carolina operations into our Florida facility.  We expect that the consolidation will enhance long-term competitiveness and improve efficiencies.

Approximately 300 new positions are being created in Venice in support of the transition, scheduled to be complete by the end of our 2011 second quarter.  We received tremendous support from the local EDC and Sarasota County which proved critical to our decision making process.  We believe transitioning to a centralized location will optimize our manufacturing capacity and logistics, positioning PGT to be a stronger company with focus on growing our share within our core wind-borne debris market areas.

Looking at 2011 and beyond, we believe the worst is over, but our industry must continue to deal with challenges  including:
 
·  
High unemployment rates;
·  
Declining prices of homes;
·  
High inventories of unsold homes including the so-called “shadow market” of unsold homes, and
·  
Ongoing issues regarding foreclosures.

Liquidity and Cash Flow

We began 2007 with net debt of $128.5 million and ended fiscal 2010 with net debt of $28.0 million. Over the past four years, we reduced our debt by combining internally generated cash of $56.2 million, with net proceeds from the 2008 and 2010 rights offerings of $44.3 million.  Due to the focus on reducing debt, our net debt level is currently at its lowest year-end point since 2004.

Acquisition
 
Pursuant to an asset purchase agreement by and between Hurricane Window and Door Factory, LLC (“Hurricane”) of Ft. Myers, Florida, and our operating subsidiary, PGT Industries, Inc., effective on August 14, 2009, we acquired certain operating assets of Hurricane for approximately $1.5 million in cash.  Hurricane designed and manufactured high-end vinyl impact products for the single- and multi-family residential markets. The products provide long-term energy and structural benefits, while qualifying homeowners for the government’s energy tax credits through the American Recovery and Reinvestment Act of 2009.  This product line was developed specifically for the hurricane protection market and combines some of the highest structural ratings in the industry with excellent energy efficiency.  The acquisition of this business expanded our presence in the energy efficient vinyl impact-resistant market, increased our ability to serve the multi-story condominium market, and enhanced our ability to offer a complete line of impact products to the customer.

The purchase price paid was allocated to the assets acquired based on their estimated fair value on August 14, 2009.  The assets acquired included Hurricane’s inventory, comprised almost entirely of raw materials, and property and equipment, primarily comprised of machinery and other manufacturing equipment.  We also acquired the right to use Hurricane’s design technology and other intellectual property through the end of 2010 and the option to purchase such design technology and other intellectual property at any time through the end of 2010.  The allocation of the $1.5 million cash purchase price to the fair value of the assets acquired as of the August 14, 2009 acquisition date is as follows:
 

(in thousands)
 
Fair Values
 
Inventory
  $ 254  
Property and equipment
    623  
Identifiable intangibles
    575  
     Net assets acquired
    1,452  
Purchase price
    1,452  
     Goodwill
  $ -  

The value of inventory was established based on then current purchase prices of identical materials available from Hurricane’s existing vendors.  The value of property and equipment was established based on Hurricane’s net carrying values which we determined to approximate fair value due to, among other things, their having been in service for less than one year.  We engaged a third-party valuation specialist to assist us in estimating the fair value of the identifiable intangible assets consisting of the right to use Hurricane’s design technology and the related purchase option.  The fair value of the identifiable intangible assets was estimated using an income approach based on projections provided by management. The carrying value of the intangible assets is $0.0 million at January       1, 2011 and $0.4 million at January 2, 2010 and is included in other intangible assets, net in the accompanying balance sheet.  The intangible assets were amortized on the straight-line basis over their estimated lives of approximately 1.4 years through the end of 2010.  Amortization expense of $0.4 million and $0.2 million is included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the years ended January 1, 2011 and January 2, 2010.  Acquisition costs of less than $0.1 million are included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended January 2, 2010.  Hurricane’s operating results prior to the acquisition were insignificant.
 
On December 17, 2010 PGT exercised its option and acquired the intellectual property assets of Hurricane Window and Door Technologies, LLC of Fort Myers, FL.  With this acquisition, PGT acquired, among other things, all of the intellectual property underlying its PremierVue line of vinyl impact-resistant windows and doors for the single- and multi-family residential markets.   The purchase price was $2.8 million of which $2.6 million was paid at closing, the remainder is expected to be paid during 2011 and is included in accrued liabilities in the accompanying balance sheet as of January 1, 2011.  The carrying value of the intangible assets is included in other intangible assets, net, in the accompanying balance sheet at January 1, 2011.  The intangible assets are being amortized on the straight-line basis over their estimated useful lives of approximately 3 years.  Amortization expense of less than $0.1 million is included in selling, general and administrative expenses in the accompanying statement of operations for the year ended January 1, 2011.

 
Consolidation and Restructurings

On December 3, 2010, we announced that our Salisbury, North Carolina operations would be transferred to Venice, Florida to consolidate our window and door production at our Florida plant.  This consolidation  is expected to be completed during the second quarter of 2011 and is expected to result in approximately $7 million in annualized savings of which approximately $3.0 to $3.5 million will be realized in 2011. As a result of this consolidation, we recorded consolidation charges of $2.1 million of which $0.9 million is classified within cost of goods sold and the remaining $1.2 million is classified within the selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended January 1, 2011. Of the $2.1 million charge, approximately $0.3 million was disbursed in the fourth quarter of 2010.   The charge related primarily to employee separation costs.  The remaining $1.8 million is classified in accrued liabilities within the accompanying consolidated balance sheet as of January 1, 2011 (See Item 8, Note 8) and is expected to be disbursed in 2011. We expect the total cost of this consolidation to be approximately $6.5 million to $7.0 million with $2.1 million recognized in 2010 and the remainder to be recognized in the first half of 2011.  All cash is expected to be disbursed by the end of 2011.

On January 13, 2009, March 10, 2009, September 24, 2009 and November 12, 2009, we announced restructurings as a result of continued analysis of our target markets, internal structure, projected run-rate, and efficiency.  These actions generated approximately $15 million in annualized savings, which was in line with our expectations.  The restructurings resulted in a decrease in our workforce of approximately 260 in the first quarter, 80 in the second quarter and 140 in the fourth quarter for a total of 480 employees in both Florida and North Carolina.  As a result of the restructurings, we recorded restructuring charges of $5.4 million in the accompanying consolidated statement of operations for the year ended January 2, 2010, of which $3.1 million is classified within cost of goods sold with $1.4 million charged in the first quarter, $0.5 million in the third quarter and $1.2 million in the fourth. The remaining $2.3 million is classified within selling, general and administrative expenses of which $1.6 million is charged in the first quarter, $0.4 million in the second quarter and $0.3 million in the fourth quarter in the accompanying consolidated statement of operations for the year ended January 2, 2010.  The charge related primarily to employee separation costs.  Of the $5.4 million, $2.6 million was disbursed in the first quarter of 2009, $0.3 million in the second quarter, $0.4 million in the third quarter and $1.2 million in the fourth quarter.  The remaining $0.9 million is classified within accrued liabilities in the accompanying consolidated balance sheet as of January 2, 2010 (See Item 8, Note 8) and was disbursed in 2010.

On March 4, 2008, we announced a restructuring as a result of continued analysis of our target markets, internal structure, projected run-rate, and efficiency.  These actions generated approximately $8 million in annualized savings, which was in line with our expectations.  The restructuring resulted in a decrease in our workforce of approximately 300 employees and included employees in both Florida and North Carolina.  As a result of the restructuring, we recorded a restructuring charge of $2.1 million in 2008, of which $1.1 million is classified within cost of goods sold and $1.0 million is classified within selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended January 3, 2009.  The charge related primarily to employee separation costs.  Of the $2.1 million, $1.8 million was disbursed in the first quarter of 2008 and $0.3 million was disbursed in 2009.

On October 25, 2007, we announced a restructuring as a result of an in-depth analysis of our target markets, internal structure, projected run-rate, and efficiency.  The restructuring resulted in a decrease in our workforce of approximately 150 employees and included employees in both Florida and North Carolina.  The restructuring was undertaken in an effort to streamline operations, as well as improve processes to drive new product development and sales.  As a result of the restructuring, we recorded a restructuring charge of $2.4 million in 2007, of which $0.7 million was classified within cost of goods sold and $1.7 million was classified within selling, general and administrative expenses.  The charge related primarily to employee separation costs.  Of the $2.4 million charge, $1.5 million was disbursed in 2007 and $0.9 million was disbursed in 2008.




The following table provides information with respect to the accrual for consolidation and restructuring costs:



   
Beginning of Year
   
Charged to Expense
   
Disbursed in Cash
   
End of Year
 
(in thousands)
                       
     Year ended January 1, 2011:
                       
2009 Restructuring
  $ 898     $ -     $ (898 )   $ -  
2010 Consolidation
    -       2,053       (241 )     1,812  
     For the year ended January 1, 2011
  $ 898     $ 2,053     $ (1,139 )   $ 1,812  
                                 
     Year ended January 2, 2010:
                               
2008 Restructuing
  $ 332     $ -     $ (332 )   $ -  
2009 Restructuring
    -       5,395       (4,497 )     898  
     For the year ended January 2, 2010
  $ 332     $ 5,395     $ (4,829 )   $ 898  
                                 
     Year ended January 3, 2009:
                               
2007 Restructuing
  $ 850     $ -     $ (850 )   $ -  
2008 Restructuring
    -       2,131       (1,799 )     332  
     For the year ended January 3, 2009
  $ 850     $ 2,131     $ (2,649 )   $ 332  


Non-GAAP Financial Measures – Items Affecting Comparability

Below is a presentation of EBITDA, a non-GAAP measure, which we believe is useful information for investors (in thousands):

 

   
Year Ended
 
   
January 1,
   
January 2,
   
January 3,
 
   
2011
   
2010
   
2009
 
                   
Net loss
  $ (14,495 )   $ (9,417 )   $ (163,032 )
Interest expense
    5,123       6,698       9,283  
Income tax expense (benefit)
    77       (5,584 )     (28,789 )
Depreciation
    9,180       10,435       11,518  
Amortization
    6,028       5,731       5,570  
                         
EBITDA (1)(2)
  $ 5,913     $ 7,863     $ (165,450 )
                         
                         
(1) Includes the impact of the following expenses:
         
     Consolidation/Restructuring charges (a)
  $ (2,053 )   $ (5,395 )   $ (2,131 )
     Impairment charges (b)
    (5,561 )     (742 )     (187,748 )

 
(a)  
Represents charges related to consolidation actions taken in 2010 and restructuring actions taken in 2009, and 2008.  These charges relate primarily to employee separation costs.

(b)  
In 2010, primarily represents the write-down of the value of the Salisbury and Lexington, North Carolina properties, and certain fixed assets related to the consolidation of the Salisbury, North Carolina operations into Venice, Florida. In 2009, represents the write-down of the value of the Lexington, North Carolina property. In 2008, represents goodwill and indefinite lived asset impairment charges.

 
(2) EBITDA is defined as net income plus interest expense (net of interest income), income taxes, depreciation, and amortization. EBITDA is a measure commonly used in the window and door industry, and we present EBITDA to enhance your understanding of our operating performance. We use EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that EBITDA is an operating performance measure that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles, and ages of related assets among otherwise comparable companies. While we believe EBITDA is a useful measure for investors, it is not a measurement presented in accordance with United States generally accepted accounting principles, or GAAP. You should not consider EBITDA in isolation or as a substitute for net income, cash flows from operations, or any other items calculated in accordance with GAAP.

 
RESULTS OF OPERATIONS

Analysis of Selected Items from our Consolidated Statements of Operations



                               
   
Year Ended
   
Percent Change
 
   
January 1,
   
January 2,
   
January 3,
   
Increase /(Decrease)
 
   
2011
   
2010
   
2009
      2010-2009       2009-2008  
                                   
(in thousands, except per share amounts)
                                 
Net sales
  $ 175,741     $ 166,000     $ 218,556       5.9 %     (24.0 %)
Cost of sales
    125,403       121,622       150,277       3.1 %     (19.1 %)
                                         
     Gross margin
    50,338       44,378       68,279       13.4 %     (35.0 %)
     As a percentage of sales
    28.6 %     26.7 %     31.2 %                
                                         
Impairment charges
    5,561       742       187,748                  
SG&A expenses
    54,091       51,902       63,109       4.2 %     (17.8 %)
SG&A expenses as a percentage of sales
    30.8 %     31.3 %     28.9 %                
                                         
     Loss from operations
    (9,314 )     (8,266 )     (182,578 )                
                                         
Interest expense, net
    5,123       6,698       9,283                  
Other (income) expense, net
    (19 )     37       (40 )                
Income tax expense (benefit)
    77       (5,584 )     (28,789 )                
                                         
     Net loss
  $ (14,495 )   $ (9,417 )   $ (163,032 )                
                                         
     Net loss per common share:
                                       
Diluted
  $ (0.29 )   $ (0.26 )   $ (5.08 )                

 
2010 Compared with 2009

Net sales

Net sales for 2010 were $175.7 million, a $9.7 million, or 5.9%, increase in sales from $166.0 million in the prior year.

The following table shows net sales classified by major product category (in millions):


                               
   
Year Ended
       
   
January 1, 2011
   
January 2, 2010
       
   
Sales
   
% of sales
   
Sales
   
% of sales
   
% change
 
Product category:
                             
     WinGuard Windows and Doors
  $ 109.3       62.2 %   $ 108.2       65.2 %     1.0 %
     Other Window and Door Products
    66.4       37.8 %     57.8       34.8 %     14.9 %
                                         
     Total net sales
  $ 175.7       100.0 %   $ 166.0       100.0 %     5.9 %


Net sales of WinGuard Windows and Doors were $109.3 million in 2010, an increase of $1.1 million, or 1.0%, from $108.2 million in net sales for the prior year.  The increase in sales of our WinGuard products was driven mainly by an increase in our vinyl WinGuard sales of 20%, offset by a slight decrease in aluminum WinGuard of 2%.  WinGuard sales, especially into our repair and remodeling market, continue to be impacted by the lack of storm activity during the four most recent hurricane seasons in Florida.

Net sales of Other Window and Door Products were $66.4 million in 2010, an increase of $8.6 million, or 14.9%, from $57.8 million for the prior year. This increase was due mainly to the increase in vinyl non-impact products, including the new products launched in each of the last three years.  In total, we had an increase in sales of $7.3 million for those products.  One of the aforementioned products is the vinyl non-impact product designed for Florida that was launched in 2010.    Sales for that product were $2.6 million during the year.  Finally, sales of our new PremierVue products introduced in the third quarter of 2009, were up $2.9 million.

 
-18-

 
Gross margin

Gross margin was $50.3 million in 2010, an increase of $6.0 million, or 13.4%, from $44.4 million in the prior year. The gross margin percentage was 28.6% in 2010 compared to 26.7% in the prior year.  Cost of goods sold includes charges of $0.9 million in 2010 and $3.1 million in 2009 related to the consolidation actions taken in 2010 and restructuring actions taken in 2009, respectively.  Adjusting for these charges, gross margin was 29.1% in 2010 and 28.6% in 2009.  The 0.5% increase in adjusted gross margin as a percent of sales is largely due to savings generated from cost saving initiatives (1.3%), the increase in sales allowing us to increase our leverage on fixed costs (1.3%), and a decrease in the cost of aluminum (0.3%)  Partially offsetting these increases in gross margin was a shift to non-impact products (2.3%) which carry a contribution margin of approximately 21%.  In comparison, our various impact products, both aluminum and vinyl, have contribution margins that range from 40% to 55%.

Impairment Charges

In 2010, there was an impairment charge of $5.6 million related primarily to the closing of our Salisbury, North Carolina facility.  Impairment charges totaled $0.7 million in 2009 for our Lexington manufacturing facility for which we entered into an agreement to list the property for sale in January 2010 and a contract to sell it in January 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $54.1 million, an  increase of $2.2 million, or 4.2%, from $51.9 million in the prior year. Selling, general and administrative expenses includes charges of $1.2 million in 2010 and $2.3 million in 2009 related to the consolidation actions taken in 2010 and restructuring actions taken in 2009, respectively.  Excluding the charges for consolidation in 2010 and restructuring in 2009 selling, general and administrative expense increased $3.3 million and as a percentage of sales was 30.1% in 2010 compared to 29.9% in 2009.   This increase was due mainly to an increase in bonuses of $2.1 million based on achieved targets, non-cash stock compensation of $1.8 million, an increase in commissions of $0.5 million due in part to an increase in sales and an increase in fuel of $0.4 million due to the increase in diesel fuel prices and the increase in sales.  Offsetting these partially was a $1.4 million decrease in personnel-related cost due to lower employment levels related to our prior year restructurings.

Interest expense

Interest expense was $5.1 million in 2010, a decrease of $1.6 million from $6.7 million in the prior year. During 2010 we prepaid $18.0 million of debt resulting in a lower average level of debt when compared to 2009. The interest rate on our debt decreased from 7.25% at the end of 2009 to 6.75% at the end of 2010 due to a decrease in our leverage ratio which decreased our interest rates in accordance with our tiered interest rate structure.

Other (income) expenses, net

There was other income of less than $0.1 million in 2010 and  in 2009.  In both years, the other (income) expense  relates to effective over-hedges of aluminum.

Income tax expense (benefit)

Our effective combined federal and state tax rate was an expense of 0.5% and a benefit of 37.2% for the years ended January 1, 2011 and January 2, 2010, respectively.  The 0.5% expense relates to an adjustment to the provision recorded at the end of 2009 to the tax return as filed.  All deferred tax assets created in 2010 were fully reserved with additional valuation allowances. The 37.2% tax rate in 2009 relates primarily to a loss carry-back receivable of approximately $3.7 million related to the recently passed legislation allowing companies to carry-back 2009 or 2008 losses up to 5 years, as well as an income tax allocation of $1.8 million between current operations and other comprehensive income. All other deferred tax assets created in 2009 were fully reserved with additional valuation allowances.  Excluding the effects of these items, our 2010 and 2009 effective tax rates would have been 35.6% and 34.6% for each year, respectively.


2009 Compared with 2008

The year ended January 2, 2010 consisted of 52 weeks. The year ended January 3, 2009 consisted of 53 weeks.   We do not believe the impact on comparability of results is significant.

Net sales

Net sales for 2009 were $166.0 million, a $52.6 million, or 24.0%, decrease in sales from $218.6 million in the prior year.

The following table shows net sales classified by major product category (in millions):



   
Year Ended
     
   
January 2, 2010
   
January 3, 2009
       
   
Sales
   
% of sales
   
Sales
   
% of sales
   
% change
 
Product category:
                             
     WinGuard Windows and Doors
  $ 108.2       65.2 %   $ 151.8       69.4 %     (28.7 %)
     Other Window and Door Products
    57.8       34.8 %     66.8       30.6 %     (13.5 %)
                                         
     Total net sales
  $ 166.0       100.0 %   $ 218.6       100.0 %     (24.0 %)


Net sales of WinGuard Windows and Doors were $108.2 million in 2009, a decrease of $43.6 million, or 28.7%, from $151.8 million in net sales for the prior year.  Volume attributed to $36.5 million of the decline, while the remaining $7.1 million decline is mainly a result of a shift in mix towards vinyl WinGuard products which carry a lower selling price than aluminum WinGuard products.  During 2009, sales of vinyl WinGuard products were up 12% compared to 2008, while sales of aluminum WinGuard were down 33%.  The decrease in sales of our WinGuard products was driven mainly by the impact of the credit crisis affecting consumers’ ability and desire to remodel their homes as well as the decline in new home construction.  Finally, the decline is also a result, to some extent, of the lack of storm activity during the three most recent hurricane seasons in the coastal markets of Florida we serve.

Net sales of Other Window and Door Products were $57.8 million in 2009, a decrease of $9.0 million, or 13.5%, from $66.8 million for the prior year. The decrease was mainly due to a reduction in aluminum non-impact and commercial products sales of 33%, offset by an increase in vinyl non-impact and other sales which were up 46%.  The increase in vinyl non-impact sales is a result of our continued strategy to grow in markets outside the state of Florida.  To further that goal, we have introduced several new vinyl non-impact products over the past two years, whose sales have exceeded expectations.  These new products accounted for $8.0 million in sales in 2009, and $1.4 million in sales in 2008.

Gross margin

Gross margin was $44.4 million in 2009, a decrease of $23.9 million, or 35.0%, from $68.3 million in the prior year. The gross margin percentage was 26.7% in 2009 compared to 31.2% in the prior year. This decrease was largely due to lower overall sales volumes which reduced our ability to leverage fixed costs, a shift in mix towards non-impact products which carry a lower margin, as well as an increase in restructuring charges included in costs of goods sold of $2.0 million in 2009.   Offsetting these items in part is a decrease in the average cost of aluminum of approximately $0.26 per pound, and overhead cost reductions from the cost savings initiatives.  Cost of goods sold includes charges of $3.1 million in 2009 and $1.1 million in 2008 related to the restructuring actions taken in each year.

In 2008, we recognized a business interruption insurance recovery of $0.7 million, classified as a reduction of cost of goods sold in the accompanying consolidated statement of operations for the year ended January 3, 2009, of incremental expenses we incurred relating to a November 2005 fire that idled a major laminated glass manufacturing asset and which required us to purchase laminated glass from an outside vendor at a price exceeding our cost to manufacture.  The proceeds were used for general corporate purposes.

Impairment Charges

In 2009, there was an impairment charge of $0.7 million related to a manufacturing facility for which we entered into an agreement to list the property for sale in January 2010. Impairment charges totaled $187.7 million in 2008, of which $169.6 million related to goodwill and $18.1 million related to our trademarks.

Due to the continued decline in the housing markets, during the second quarter of 2008, we determined that the carrying value of goodwill exceeded its fair value, indicating that it was impaired.  Having made this determination, we then began performing the second step of the goodwill impairment test which involves calculating the implied fair value of our goodwill by allocating the fair value to all of our assets and liabilities other than goodwill (including both recognized and unrecognized intangible assets) and comparing it to the carrying amount of goodwill.  We recorded a $92.0 million estimated goodwill impairment charge in the second quarter of 2008.  During the third quarter of 2008, we finalized the second step of the goodwill impairment test and, as a result, recorded an additional $1.3 million goodwill impairment charge.

During the third quarter of 2008, as part of finalizing our goodwill impairment test discussed above, we made certain changes to the assumptions that affected the previous estimate of fair value and, when compared to the carrying value of our trademarks, resulted in a $0.3 million impairment charge in the third quarter of 2008.

We performed our annual assessment of goodwill impairment as of January 3, 2009. Given a further decline in housing starts and the overall tightening of the credit markets, our revised forecasts indicated additional impairment of our goodwill.  After allocating the fair value to our assets and liabilities other than goodwill, we concluded that goodwill had no implied fair value and the remaining carrying value was written-off.  After recognizing these charges, we do not have any goodwill remaining on the accompanying consolidated balance sheet as of January 3, 2009.

 We also performed our annual assessment of our trademarks as of January 3, 2009, which indicated that further impairment was present resulting in an additional impairment charge of $17.8 million in the fourth quarter of 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $51.9 million, a decrease of $11.2 million, or 17.8%, from $63.1 million in the prior year.  This decrease was mainly due to decreases of $6.7 million in personnel-related costs due to lower employment levels, $1.4 million in marketing costs due to decreased levels of general advertising and promotional costs, $1.8 million in fuel costs related to lower sales and lower prices for diesel.  The remaining $1.3 million decrease in selling, general and administrative expenses is volume related as the general level of spending in this area has declined with sales.  As a percentage of sales, selling, general and administrative expenses increased to 31.3% in 2009 compared to 28.9% for the prior year. This increase was due to the fact that our ability to leverage certain fixed portions of support and administrative costs did not decrease at the same rate as the decrease in net sales.

Charges of $2.3 million in 2009 and $1.0 million in 2008 related to the restructuring actions taken in each year are included in selling, general and administrative expenses.

Interest expense

Interest expense was $6.7 million in 2009, a decrease of $2.6 million from $9.3 million in the prior year. During 2009, we prepaid $22.0 million of debt resulting in a lower average level of debt when compared to 2008. The interest rate on our debt increased from 6.25% at the end of 2008 to 7.25% at the end of 2009 due to an increase in our leverage ratio which increased our interest rates in accordance with our tiered interest rate structure.

Other expenses (income), net

There was other expense of less than $0.1 million in 2009 compared to other income of less than $0.1 million in 2008.  In both years, the other expense (income) relates to effective over-hedges of aluminum.

Income tax benefit

Our effective combined federal and state tax rate was a benefit of 37.2% and 15.0% for the years ended January 2, 2010 and January 3, 2009, respectively.  The 37.2% tax rate in 2009 relates primarily to a loss carry-back receivable of approximately $3.7 million related to the recently passed legislation allowing companies to carry-back 2009 or 2008 losses up to 5 years, as well as an income tax allocation of $1.8 million between current operations and other comprehensive income. All other deferred tax assets created in 2009 were fully reserved with additional valuation allowances.  The 15.0%  effective tax rate in 2008 resulted from the tax effects totaling $41.3 million related to the write-off of the non-deductible portion of goodwill and $4.6 million related to the valuation allowance on deferred tax assets recorded in the fourth quarter of 2008. Excluding the effects of these items, our 2009 and 2008 effective tax rates would have been 34.6% and 39.0%, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES
 
 
Our principal source of liquidity is cash flow generated by operations, supplemented by borrowings under our credit facility.  This cash generating capability provides us with financial flexibility in meeting operating and investing needs.  Our primary capital requirements are to fund working capital needs, and to meet required debt payments, including debt service payments on our credit facilities and fund capital expenditures.
 
 
2010 Rights Offering

On January 29, 2010, the Company filed Amendment No. 1 to the Registration Statement on Form S-1 filed on December 24, 2009 relating to a previously announced offering of rights to purchase 20,382,326 shares of the Company’s common stock with an aggregate value of approximately $30.6 million.  The registration statement relating to the rights offering was declared effective by the United States Securities and Exchange Commission on February 10, 2010, and the Company distributed to each holder of record of the Company’s common stock as of close of business on February 8, 2010, at no charge, one (1) non-transferable subscription right for every one and three-quarters (1.75) shares of common stock held by such holder under the basic subscription privilege.  Each whole subscription right entitled its holder to purchase one share of PGT’s common stock at the subscription price of $1.50 per share.  The rights offering also contained an over-subscription privilege that permitted all basic subscribers to purchase additional shares of the Company’s common stock up to an amount equal to the amount available to each such holder under the basic subscription privilege.  Shares issued to each participant in the over-subscription were determined by calculating each subscriber’s percentage of the total shares over-subscribed, multiplied by the number of shares available in the over-subscription privilege.  The rights offering expired on March 12, 2010.

The rights offering was 90.0% subscribed resulting in the Company distributing 18,336,368 shares of its common stock, including 15,210,184 shares under the basic subscription privilege and 3,126,184 under the over-subscription privilege, representing a 74.6% basic subscription participation rate.  There were requests for 3,126,184 shares under the over-subscription privilege representing an allocation rate of 100% to each over-subscriber.  Of the 18,336,368 shares issued, 13,333,332 shares were issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder, including 10,719,389 shares issued under the basic subscription privilege and 2,613,943 shares issued under the over-subscription privilege.  Prior to the rights offering, JLL held 18,758,934 shares, or 52.6%, of the Company’s outstanding common stock.  With the completion of the rights offering, the Company has 54,005,439 total shares of common stock outstanding of which JLL holds 59.4%.

Net proceeds of $27.5 million from the rights offering were used to repay a portion of the outstanding indebtedness under our amended credit agreement in the amount of $15.0 million, and for general corporate purposes in the amount of $12.5 million.

2008 Rights Offering

On August 1, 2008, the Company filed Amendment No. 1 to the Registration Statement on Form S-3 filed on March 28, 2008 relating to a previously announced offering of rights to purchase 7,082,687 shares of the Company’s common stock with an aggregate value of approximately $30 million.  The registration statement relating to the rights offering was declared effective by the United States Securities and Exchange Commission on August 4, 2008 and the Company distributed to each holder of record of the Company’s common stock as of close of business on August 4, 2008, at no charge, one non-transferable subscription right for every four shares of common stock held by such holder under the basic subscription privilege.  Each whole subscription right entitled its holder to purchase one share of PGT’s common stock at the subscription price of $4.20 per share.  The rights offering also contained an over-subscription privilege that permitted all basic subscribers to purchase additional shares of the Company’s common stock up to an amount equal to the amount available to each under the basic subscription privilege.  Shares issued to each participant in the over-subscription were determined by calculating each subscribers’ percentage of the total shares over-subscribed, multiplied by the number of shares available in the over-subscription privilege.  The rights offering expired on September 4, 2008.

The rights offering was fully subscribed resulting in the Company distributing all 7,082,687 shares of its common stock available, including 6,157,586 shares under the basic subscription privilege and 925,101 under the over-subscription privilege, representing an 86.9% basic subscription participation rate.  There were requests for 4,721,763 shares under the over-subscription privilege representing an allocation rate of 19.6% to each over-subscriber for the 925,101 shares available in the over subscription.  Of the 7,082,687 shares issued, 4,295,158 shares were issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder, including 3,615,944 shares issued under the basic subscription privilege and 679,214 shares issued under the over-subscription privilege.  Prior to the rights offering, JLL held 14,463,776 shares, or 51.1%, of the Company’s outstanding common stock.  With the completion of the rights offering, the Company has 35,413,438 total shares of common stock outstanding of which JLL holds 53.0%.

Net proceeds of $29.3 million from the rights offering were used to repay a portion of the outstanding indebtedness under our amended credit agreement.

Consolidated Cash Flows

Operating activities.   Cash provided by operating activities was $12.3 million for 2010 compared to cash provided by operating activities $9.5 million for the prior year. In 2009, cash provided by operating activities was down $10.4 million from $19.9 million in 2008.  The increase in cash flow from operations between 2010 and 2009 is due mainly to the impact of the tax refund of $3.7 million received during 2010, and the increase in cash consistent with the increase in sales. Offsetting this partially is the increase in disbursements.  In 2010 we began taking early pay discounts on a few large vendors that we did not take at the end of 2009.  The decrease between 2009 and 2008 is due mainly to the impact of lower sales, offset somewhat by cost savings initiatives. Direct cash flows from operations for 2010, 2009 and 2008 are as follows:
 

                   
   
Direct Operating Cash Flows
 
(in millions)
 
2010
   
2009
   
2008
 
Collections from customers
  $ 178.0     $ 170.2     $ 224.5  
Other cash collections
    2.6       2.8       3.4  
Disbursements to vendors
    (106.5 )     (94.7 )     (122.5 )
Personnel related disbursements
    (61.2 )     (63.6 )     (80.2 )
Debt service costs
    (4.3 )     (6.2 )     (9.1 )
Other cash activity, net
    3.7       1.0       3.8  
                         
Cash from operations
  $ 12.3     $ 9.5     $ 19.9  

Other cash activity, net, includes $3.7 million, $1.1 million and $3.3 million in federal and state tax refunds in the years ended January 1, 2011, January 2, 2010 and January 3, 2009, respectively.  The majority of other cash collections are from scrap aluminum sales.

Day’s sales outstanding (DSO), which we calculate as accounts receivable divided by average daily sales, was 42 days at January 1, 2011 compared to 41 days at January 2, 2010 and 39 days at January 3, 2009.  This increase in DSO over the past two years was primarily due to collection issues with three select customers, one of which, amounting to $0.6 million, was fully written off during 2010, as well as the effect on our customer base of the decline in the housing market in Florida and the overall economy.

The gross amount of receivables from the remaining two customers, neither of which is greater than $0.6 million, is $1.1 million as of January 1, 2011, of which $0.9 million is reserved.  As of March 11, 2011 payments of less than $0.1 million have been received pursuant to such payment plans.

Inventory on hand as of January 1, 2011, increased $0.7 million as compared to January 2, 2010.  Inventory turns for the year ended January 1, 2011 decreased to 11.2 from 12.4 as compared to the year ended January 2, 2010.  Inventory turns for the year ended January 2, 2010 was 12.4 compared to 14.8 for the year ended January 3, 2009.  We have increased our inventory to have (i) raw materials required to support new product launches; (ii) an increase in safety stocks on certain items to ensure an adequate supply of availability given a sudden increase in demand and our short lead-times; and (iii) adequate lead times for raw materials purchased from overseas suppliers in bulk supply.

Management monitors and evaluates raw material inventory levels based on the need for each discrete item to fulfill short-term requirements calculated from current order patterns and to provide appropriate safety stock.  Because all our products are made-to-order, the Company has only a small amount of finished goods and work in progress inventory.  Because of these factors, our inventories are not excessive, and we believe the value of such inventories will be realized.
 
Investing activities. Cash used in investing activities was $6.0 million for 2010 compared to cash provided by investing activities of $0.4 million for 2009. The increase in cash used in investing activities was due a total increase in  capital spending,  including the 2010 and 2009 purchases of assets related to the Hurricane Window & Door Factory acquisition, of $2.0 million and the impact of net cash used for excess margin returns for settlements of forward contracts related to our aluminum hedging program.  In 2009, we settled $3.4 million in contracts that were funded by margin calls in 2008, as well as received a return of $0.7 million in excess margin as a result of the increase in aluminum prices, especially during the fourth quarter of 2009.


Cash from investing activities was $0.4 million for 2009, compared to cash used of $8.5 million for 2008. The increase in cash from investing activities was due to the impact of net cash received from excess margin returns for settlements of forward contracts related to our aluminum hedging program.  In 2009, we settled $3.4 million in contracts that were funded by margin calls in 2008, as well as received a return of $0.7 million in excess margin as a result of the increase in aluminum prices, especially during the fourth quarter of 2009.   Capital spending, including the acquisition of Hurricane Window and Door Factory assets totaled $3.8 million in 2009, which is $0.7 million lower than total capital spending of $4.5 million in 2008 due to continued efforts to reduce capital spending.

Financing activities. Cash provided by financing activities was $8.3 million in 2010.  Using cash generated from the 2010 rights offerings, which resulted in $27.3 million in net cash proceeds, we prepaid an additional $15 million of our long term debt in March and another $3.0 million in October, for a total $18.0 million in debt prepayment in 2010.  Payment of deferred financing costs related to the effectiveness of the amendment of our credit agreement totaled $0.9 million.
 
Cash used in financing activities was $22.1 million in 2009.  With cash generated from operations during 2009 and cash on hand we prepaid $8.0 million of our long-term debt in June, $12.0 million in September and another $2.0 million in December, for a total of $22 million in debt prepayments in 2009.  In December 2009, we also repaid the $12.0 million of revolver borrowing that occurred in October 2009.

 Cash used in financing activities was $11.2 million in 2008. In June 2008, we prepaid $10.0 million of our long-term debt with cash generated from operations.  Using proceeds from the rights offering, which resulted in $29.3 million in net cash proceeds, we prepaid an additional $20.0 million of our long-term debt in August 2008 and another $10.0 million in September 2008, for a total of $40 million in debt prepayments in 2008.  Cash proceeds from stock option exercises in 2008 totaled $0.2 million.  Payment of deferred financing costs related to the effectiveness of the amendment of our credit agreement totaled $0.6 million.

Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions.  For 2010, capital expenditures were $3.2 million, compared to $2.3 million for 2009.  In 2009 and 2010, we reduced certain discretionary capital spending to conserve cash.  We anticipate that cash flows from operations and liquidity from the revolving credit facility will be sufficient to execute our business plans.

Capital Resources. On February 14, 2006, we entered into a second amended and restated $235 million senior secured credit facility and a $115 million second lien term loan due August 14, 2012, with a syndicate of banks. The senior secured credit facility was composed of a $30 million revolving credit facility and, initially, a $205 million first lien term loan. As of January 1, 2011, there was $22.3 million available under the revolving credit facility.

On April 30, 2008, we announced that we entered into an amendment to the credit agreement.  The amendment, among other things, relaxed certain financial covenants through the first quarter of 2010, increased the applicable rate on loans and letters of credit, and set a LIBOR floor.  The effectiveness of the amendment was conditioned, among other things, on the repayment of at least $30 million of loans under the credit agreement no later than August 14, 2008, of which no more than $15 million was permitted to come from cash on hand.  In June 2008, we used cash generated from operations to prepay $10 million of outstanding borrowings under the credit agreement.  Using proceeds from the rights offering, we made an additional prepayment of $20 million on August 11, 2008, bringing total prepayments of debt at that time to $30 million as required under the amended credit agreement.  Having made the total required prepayment and having satisfied all other conditions to bring the amendment into effect, including the payment of the fees and expenses of the administrative agent and a consent fee to participating lenders of 25 basis points of the then outstanding balance under the credit agreement of $100 million, the amendment became effective on August 11, 2008.

Under the amendment, the first lien term loan bore interest at a rate equal to an adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our option.  The margin in either case was dependent on our leverage ratio.  The loans under the revolving credit facility bore interest at a rate equal to an adjusted LIBOR rate plus a margin depending on our leverage ratio ranging from 3.0% per annum to 4.75% per annum or a base rate plus a margin ranging from 2.0% per annum to 3.75% per annum, at our option.  The amendment established a floor of 3.25% for adjusted LIBOR.  Prior to the effectiveness of the amendment, the first lien term loan bore interest at a rate equal to an adjusted LIBOR rate plus 3.0% per annum or a base rate plus 2.0% per annum, at our option. The loans under the revolving credit facility bore interest initially, at our option, at a rate equal to an adjusted LIBOR rate plus 2.75% per annum or a base rate plus 1.75% per annum, and the margins above LIBOR and base rate could have declined to 2.00% for LIBOR loans and 1.00% for base rate loans if certain leverage ratios were met.

On December 24, 2009, we announced that we entered into a third amendment to the credit agreement.  The amendment, among other things, provides a leverage covenant holiday for 2010, increases the maximum leverage amount for the first quarter of 2011 to 6.25 times (then dropping 0.25X per quarter from the second quarter until the end of the term, extends the due date on the revolver loan until the end of 2011, increases the applicable rate on any outstanding revolver loan by 25 basis points, and sets a base rate floor of 4.25%.  The effectiveness of the amendment was conditioned, among other things, on the repayment of at least $17 million of term loan under the credit agreement no later than March 31, 2010, of which no more than $2 million was permitted to come from cash on hand.  In December 2009, the Company used cash generated from operations to prepay $2 million of outstanding borrowings under the credit agreement.  Using proceeds from the second rights offering, the Company made an additional prepayment of $15 million on March 17, 2010, bringing total prepayments of debt at that time to $17 million as required under the amended credit agreement. See Item 8, Note 16 for a discussion of the second rights offering. Having made the total required prepayment and having satisfied all other conditions to bring the amendment into effect, including the payment of the fees and expenses of the administrative agent and a consent fee to participating lenders of 50 basis points of the then outstanding balance of the term loan and the revolving commitment under the credit agreement of $100 million, the amendment became effective on March 17, 2010.  Fees paid to the administrative agent and lenders totaled $1.0 million, of which $0.9 million are deferred financing fees and are being amortized using the effective interest method over the remaining term of the credit agreement.

Under the third amendment, the first lien term loan bears interest at a rate equal to an adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our option, which is equivalent to the rates in the second amendment.  The margin in either case is dependent on our leverage ratio.  The loans under the revolving credit facility bear interest at a rate equal to an adjusted LIBOR rate plus a margin depending on our leverage ratio ranging from 3.00% per annum to 5.00% per annum or a base rate plus a margin ranging from 2.00% per annum to 4.00% per annum, at our option.  The amendment established a floor of 4.25% for base rate loans and continued the 3.25% floor for adjusted LIBOR established in the previous amendment.

Based on our ability to generate cash flows from operations and our borrowing capacity under the revolver and under the senior secured credit facility, we believe we will have sufficient capital to meet our short-term and long-term needs, including our capital expenditures and our debt obligations in 2011.

Long-term debt including current portions and excluding capital lease obligations consisted of the following:
             
   
January 1,
   
January 2,
 
   
2011
   
2010
 
                    (in thousands)
             
 Tranche A2 term note payable to a bank with a payment of $131,579
           
   due November 14, 2011. A lump sum payment of $49.9 million is due on
           
   February 14, 2012. Interest is payable quarterly at LIBOR or the prime
           
   rate plus an applicable margin. At January 1, 2011, the average rate was
           
   was 2.75% plus a margin of 4.00%.
  $ 50,000     $ 68,000  
                 
    $ 50,000     $ 68,000  

We are currently in the process of exploring our options to refinance the term loan prior to its due date and expect we will be successful, although no assurance can be made in that regard.
 


DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
 
 
The following summarizes the contractual obligations as of January 1, 2011 (in thousands):

                                     
   
Payments Due by Period
Contractual Obligations
 
Total
   
Current
   
2-3 Years
   
4 Years
   
5 Years
   
Thereafter
 
                                     
Long-term debt and capital leases (1)
  $ 54,179     $ 3,826     $ 50,353     $ -     $ -     $ -  
Operating leases
    2,202       1,038       900       218       46       -  
Supply agreements
    1,447       1,447       -       -       -       -  
Equipment purchase commitments
    56       56       -       -       -       -  
                                                 
Total contractual cash obligations
  $ 57,884     $ 6,367     $ 51,253     $ 218     $ 46     $ -  
                                                 
(1) - Includes estimated future interest expense on our long-term debt assuming the weighted average interest rate of 6.75% as of January 1, 2011 does not change.
 


              The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable operating leases with an initial or remaining term in excess of one year at January 1, 2011. Purchase orders entered into in the ordinary course of business are excluded from the above table. Amounts for which we are liable under purchase orders are reflected on our consolidated balance sheet as accounts payable and accrued liabilities.

We are obligated to purchase certain raw materials used in the production of our products from certain suppliers pursuant to stocking programs.  If these programs were cancelled by us, we would be required to pay $1.4 million for various materials.

At January 1, 2011, we had $2.7 million in standby letters of credit related to our worker’s compensation insurance coverage.

CRITICAL ACCOUNTING ESTIMATES
 
In preparing our consolidated financial statements, we follow U.S. generally accepted accounting principles. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations.

On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.  However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material.  Our significant accounting policies are discussed in Item 8, Note 1.  The following is a summary of our more significant accounting estimates that require the use of  judgment in preparing the financial statements.


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Long lived assets
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated, based on management estimates .
 
If such assets are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell, and depreciation is no longer recorded.
 
 
 
 
Estimates made by management are subject to change and include such things as how future growth assumptions, operating and capital expenditure requirements, asset useful lives and other factors, affect cash flows associated with the long lived assets.  Additionally, fair value estimates,  if required, can be affected by discount rates and/or estimates of the value of similar assets.


 
 
 
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.
 
 
 
 
 
 
Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Allowances for doubtful accounts and notes receivable and related reserves
 
Losses for allowances for doubtful accounts and notes receivable and related reserves are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in our receivables.
 
 
 
 
We evaluate the allowance for doubtful accounts and notes receivable based on specific identification of troubled balances and historical collection experience adjusted for current conditions such as the economic climate.
 
 
 
 
Actual collections can differ from our estimates, requiring adjustments to the allowances .  A 10% difference between actual and estimated losses derived from the estimated reserve for accounts and notes receivable would impact net loss by approximately $0.2 million.
 
Other Intangibles
 
The impairment evaluation of the carrying amount of intangible assets with indefinite lives is conducted annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed by comparing the carrying amount of these assets to their estimated fair values. If the estimated fair value is less than the carrying amount of the intangible asset, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is determined using the relief from royalty method that is based upon the discounted projected cost savings (value) attributable to ownership of our trademarks, our only indefinite lived intangible assets
 
 
 
In estimating fair value, the method we use requires us to make assumptions, the most material of which are net sales projections attributable to products sold with these trademarks, the anticipated royalty rate we would pay if the trademarks were not owned (as a percent of net sales), and a weighted average discount rate.  These assumptions are subject to change based on changes in the markets in which these products are sold, which impact our projections of future net sales and the assumed royalty rate.  Factors affecting the weighted average discount rate include assumed debt to equity ratios, risk-free interest rates and equity returns, each for market participants in our industry. 
 
Our year-end test of trademarks, performed as of January 1, 2011, utilized a weighted average royalty rate of 4.0% and a discount rate of 16.8%.  Net sales used in the analysis were based on historical experience and a modest growth in future years.  
 
 
 
Actual results can differ from our estimates, requiring adjustments to our assumptions.  The result of these changes could result in a material change in our calculation and an impairment in our other intangible assets.
 
As of January 1, 2011, the estimated fair value of the trademarks exceeded book value by approximately 15%, or $6.6 million.  We believe our projected sales are reasonable based on, among other things, available information regarding our industry.  We also believe the royalty rate is appropriate and could improve over time based on market trends and information.  The weighted average discount rate was based on current financial market trends and will remain dependent on such trends in the future.  Absent offsetting changes in other factors, a 1% increase in the discount rate would decrease the estimated fair value of our trademarks by approximately $3.6 million but would not result in an impairment.
Warranty
 
We have warranty obligations with respect to most of our manufactured products. Obligations vary by product components. The reserve for warranties is based on our assessment of the costs that will have to be incurred to satisfy warranty obligations on recorded net sales
 
 
 
The reserve is determined after assessing our warranty history and specific identification of our estimated future warranty obligations
 
 
 
Changes to actual warranty claims incurred and interest rates could have a material impact on our estimated warranty obligations.
 
 
 
Self Insurance Reserves
 
We are primarily self-insured for employee health benefits and for years prior to 2010 for workers’ compensation.  For 2010 we are fully insured with respect to workers’ compensation.
 
 
 
 
Our workers’ compensation reserves, for the self-insured periods 2009 and prior, are accrued based on third party actuarial valuations of the expected future liabilities. Health benefits are self-insured by us up to pre-determined stop loss limits. These reserves, including incurred but not reported claims, are based on internal computations. These computations consider our historical claims experience, independent statistics, and trends.
 
 
 
 
Changes to actual workers’ compensation or health benefit claims incurred and interest rates could have a material impact on our estimated self-insurance reserves.




Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Stock-Based Compensation
       
We utilize a fair-value based approach for measuring stock-based compensation to recognize the cost of employee services received in exchange for our Company’s equity instruments.   We determine the fair value of our stock option awards at the date of grant using the Black-Scholes model.
 
We record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. Our awards vest based only on service conditions and compensation expense is recognized on a straight-line basis for each separately vesting portion of an award.

 
 

 
 
 
 
Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield, future employee forfeiture rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate.
 
Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and we have applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates, based mostly on historical experience, will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.


 
 
 
We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense.
 
However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material.
 
A 10% change in our stock-based compensation expense for the year ended January 1, 2011, would have affected net loss by approximately $0.2 million.


RECENTLY ISSUED ACCOUNTING STANDARDS

At this time there are no recently issued unadopted accounting standards that could potentially impact our future financial statements. The recent accounting pronouncements we have adopted are fully described in Item 8, Note 3, Recently Issued Accounting Pronouncements , in the Notes to Consolidated Financial Statements.

FORWARD OUTLOOK

The following section contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on the beliefs and assumptions of management, together with information available to us when the statements were made. Future results could differ materially from those included in such forward-looking statements as a result of, among other things, the factors set forth in Item 1A., “Risk Factors” and certain economic and business factors which may be beyond our control. Investors are cautioned that all forward-looking statements involve risks and uncertainties.

Net sales

We closed 2010 with a 5.9% increase in sales, our first year over year sales increase since 2006.  Our growth was driven by an increase in our Florida market up $8.3 million or 6.2% over 2009.  We believe the worst of the housing downturn which started in 2007, and the economic credit crisis, which started in 2008, is over.  However, there are still issues to overcome such as high unemployment rates, the continued declining prices of homes, high inventories of unsold homes, ongoing issues regarding foreclosures.

  Certain agencies that report housing start information project that single family housing starts in the U.S. will increase 10% or more in 2011.  However we will continue to operate with a more conservative view until a stable and predictable growth in the marketplace is achieved.

Gross margin

We believe the following factors, which are not all inclusive, may impact our gross margin in 2011:

·   Our gross margin percentages are heavily influenced by total sales due to operating leverage of fixed costs as well as product mix, both impact and non-impact products and also vinyl frame versus aluminum frame products, as vinyl continues to increase its share of our core market.
 
·   In the first quarter of 2011, we announced a price increase of approximately 4% effective for the second quarter of 2011 to offset the cost  increases we are seeing from our vendors,  including aluminum and glass.
 
·   During 2010 and the beginning of 2011, we entered into forward contracts for the purchase of approximately 39% of our 2011 aluminum needs at an average price of $1.00 per pound.  In addition, we have entered into zero cost collars with a ceiling of $2,700 per metric ton and a concurrent floor at $2,295 per metric ton that hedge 10% of our 2011 anticipated needs.
 
·   The North Carolina consolidation charges which are expected to total between $6.5 to $7.0 million, of which $4.4 to $4.9 million remains to be recognized in 2011 will have a negative impact on our gross margins.
 
·   A portion of our planned cost savings from our North Carolina plant closing, which we expect to realize approximately $3.0 to $3.5 million in 2011, will benefit gross margins.

Selling, general and administrative expenses

If the cost of diesel fuel were to increase again, our selling, general and administrative costs would increase. In addition, economic and credit conditions may significantly impact our bad debt expense. We continue to monitor our customer’s credit profiles carefully and make changes in our terms where necessary in response to this heightened risk.

Interest expense

We prepaid $18 million in outstanding borrowings during 2010.  We believe this decrease in debt levels for the full year of 2011 will result in our paying less interest in 2011 than in 2010.

Liquidity and capital resources

We had $22.0 million of cash on hand as of January 1, 2011. While we are confident in our ability to generate cash flow in this housing market and economy, we will use some of this cash for our planned closing of our North Carolina plant.  In addition we may use this cash to pay down debt or to fund margin calls related to our forward contracts for aluminum.  Our credit facility includes a $25 million revolving credit facility of which $22.3 million was available as of March 11, 2011.

Management expects to spend nearly $5.3 million on capital expenditures in 2011, including capital expenditures related to product line expansions targeted at increasing sales.  We expect depreciation to be approximately $7.6 million and amortization to be approximately $6.5 million in 2011.  On January 1, 2011, we had outstanding purchase commitments on capital projects of approximately $0.1 million.

Summary

Although, our decision to close our North Carolina plant and concentrate our efforts in our core market of Florida and the gulf coast regions was a difficult one, it also properly reflects our continued focus on serving markets which have the greatest potential to drive long-term profitable growth.  We believe that focusing our efforts on the Florida market, and coastal markets from Texas to the mid-Atlantic, will be the best use of our core competencies and ensure continued and even expanding market dominance in these areas.  We also believe this strategy will provide the most benefit for our stockholders, employees and other stakeholders.

   


   
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We experience changes in interest expense when market interest rates change.  We are exposed to changes in LIBOR or the base rate of our credit facility’s administrative agent.  We do not currently use interest rate swaps, caps or futures contracts to mitigate this risk. Changes in our debt could also increase these risks. Based on debt outstanding at January 1, 2011, a 1% increase (decrease) in interest rates above our interest rate floor established in the credit agreement, would result in approximately $0.5 million of additional (reduced) interest expense annually.

We utilize derivative financial instruments to hedge price movements in our aluminum materials.  We are exposed to changes in the price of aluminum as set by the trades on the London Metal Exchange. We have entered into aluminum hedging instruments that settle at various times through the end of 2011 that cover approximately 39% of our anticipated needs during 2011 at an average price of $1.00 per pound.  Short-term changes in the cost of aluminum, which can be significant, are sometimes passed on to our customers through price increases, however, there can be no guarantee that we will be able to continue to pass on such price increases to our customers or that price increases will not negatively impact sales volume, thereby adversely impacting operating margins.

For forward contracts for the purchase of aluminum at January 1, 2011, a 10% decrease in the price of aluminum would decrease the fair value of our forward contacts of aluminum by $0.3 million.   This calculation utilizes our actual commitment of 2.6 million pounds under contract (to be settled throughout 2011 excluding our zero cost collars) and the market price of aluminum as of January 1, 2011, which was approximately $1.12 per pound.

As of January 1, 2011, we had entered into zero cost collars with a ceiling of $2,700 per metric ton and a concurrent floor at $2,295 per metric ton that hedge 10% of our 2011 anticipated needs. Should prices fall within the range upon settlement, there is no cost to the collars.  If aluminum is above $2,700 per metric ton we would be able to purchase at $2,700 per ton.  If aluminum is below $2,295 per metric ton we would be required to purchase at $2,295 per metric ton.  As of January 1, 2011, aluminum is priced between our ceiling and floor.


 
   
     Item 8.   
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
         
 
   
32
 
 
   
33
 
 
   
34
 
 
   
35
 
 
   
36
 
 
   
37
 




 
 
 
 
The Board of Directors and Shareholders of
 PGT, Inc.

We have audited the accompanying consolidated balance sheets of PGT, Inc. as of January 1, 2011 and January 2, 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended January 1, 2011, January 2, 2010 and January 3, 2009.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PGT, Inc. at January 1, 2011 and January 2, 2010, and the consolidated results of its operations and its cash flows for each of the three years ended January 1, 2011, January 2, 2010 and January 3, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PGT. Inc.’s internal control over financial reporting as of January 1, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 21, 2011 expressed an unqualified opinion thereon.


 
 /s/ ERNST & YOUNG LLP
Certified Public Accountants
 
 
 
   
Tampa, Florida
March 21, 2011

 
 

   
 
 
PGT, INC.
( in thousands, except per share amounts)
 


                   
   
Year Ended
 
   
January 1,
   
January 2,
   
January 3,
 
   
2011
   
2010
   
2009
 
                   
Net sales
  $ 175,741     $ 166,000     $ 218,556  
Cost of sales
    125,403       121,622       150,277  
                         
     Gross margin
    50,338       44,378       68,279  
                         
Impairment charges
    5,561       742       187,748  
Selling, general and administrative expenses
    54,091       51,902       63,109  
                         
     Loss from operations
    (9,314 )     (8,266 )     (182,578 )
                         
Interest expense, net
    5,123       6,698       9,283  
Other (income) expense, net
    (19 )     37       (40 )
                         
     Loss before income taxes
    (14,418 )     (15,001 )     (191,821 )
                         
Income tax expense (benefit)
    77       (5,584 )     (28,789 )
                         
     Net loss
  $ (14,495 )   $ (9,417 )   $ (163,032 )
                         
     Net loss income per common share:
                       
Basic
  $ (0.29 )   $ (0.26 )   $ (5.08 )
                         
Diluted
  $ (0.29 )   $ (0.26 )   $ (5.08 )
                         
     Weighted average shares outstanding: